Many people think they need long-term care insurance, until they found this out...

“If you need it you can’t afford it. If you can afford it you don’t need it.”

I have heard this said multiple times when talking to experts about Long-Term Care Insurance.  Due to the high cost of this insurance most people can't afford to pay the premiums even if they need it.  If you are able to fit this expense into your budget you may be better off self-insuring.  

Long-Term Care Insurance is used to cover the costs of care for a person that is unable to perform activities of daily living; bathing, eating, dressing, transferring, toileting, and continence.  Generally, coverage kicks in if a person is unable to perform at least two of these activities.  There is usually a period of time before insurance starts, this is known as the elimination period, and runs anywhere from 0-180 days. If needed, the insurance will pay a set dollar amount for nursing home or in-home care.

The problem with these policies is the cost.  The premiums are very high and can increase dramatically after a set period of time, thus making the policy too expensive when you need the policy the most.  Before purchasing a policy check the rate schedule so you know exactly when premiums can (and will) be increased.  

Another problem is the large commissions the insurance salesperson receives on the sale of these policies.  This incentive causes insurance agents to push these policies to people who many times don't need it and can't afford it.  And when they actually need it they find out they were sold the wrong type of policy or their claim is challenged by the insurance company.  Keep an eye on the terms that your insurance agent will try to push on you (the daily benefit amount, length, and inflation adjustments) as they are paid additional commissions for all of these additional options they sell.

One tip - Don't ever get insurance advice from your insurance agent. They are paid by selling you insurance. Inevitably, their conclusion will be that you need more insurance. For objective advice, talk to a Fee-Only Financial Advisor, who will assess your insurance needs and put you in touch with the right insurance agent.

Do you need Long-Term Care?

If you can self-insure, this is usually a better option. Insurance companies know the odds and price everything into the policies in order to make a profit.  

Insurance people will try to scare you by telling you that two thirds of people age 65 or older will need long-term care in their lifetimes and that the average cost of a nursing home is $70,000 per year.  Sounds like a slam dunk, better go purchase some Long-Term Care insurance.  Not so fast Mr. Insurance salesmen, Medicare may already cover some of the costs of the stay in a nursing home facility and most people will not require a lengthy stay.  In fact, 42% of people turning 65 will have no private out of pocket costs for long-term care over their lifetime, 19% will have costs under $10,000 over their lifetime, 8% will have costs between $10,000 and $25,000, 14% will have costs between $25,000 and $100,000, 11% between $100,000 and $250,000, and only 5% will have costs over $250,000 over their lifetime.  

The average cost of a Long-Term Care policy is about $3,500 in 2013.  If you invest that premium from age 60 to age 85, at an 8% rate of return and a 3% inflation adjustment to your premiums, you will have approximately $360,000 to pay for your care.  This money is yours and has not been paid to the insurance company over the years. Therefore, if your costs are less, which the statistics show it probably will be, this money is yours to keep and not the insurance company's.

Now, it may sound like I am not a fan of long-term care insurance.  This is not true at all, I am just not a fan of Insurance Salesmen whose goal is to sell you a policy, regardless of whether or not it is in your best interest. (It’s always in the Insurance Salesmen’s best interest) If you happen to be in the 5% mentioned above needing more than $250,000 in Long-Term Care expenses over your lifetime, you are probably better off with the insurance then without. This is what insurance is designed for, protecting you against a large unexpected cost. The best way to determine if you really need long-term care is to take your current situation and analyze multiple long-term care scenarios and see how your situation holds up.  This can be done through Cash Flow and Monte Carlo Analysis by varying the cost and term of a long-term care stay.

If you currently have a Long-Term care policy or are considering purchasing one, have it reviewed by a fee-only financial advisor before you cancel or purchase it.  They will provide objective advice because they have no financial interest in selling the policy.

Part of every comprehensive financial plan should be an insurance needs analysis including life insurance and long-term care insurance.  Your financial advisor should be able to help you with this as long as they are not the ones selling the insurance.

Let us know if you need a policy reviewed or are looking to put together your own financial plan including your insurance needs analysis.